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McKinsey Resources or McKinsey Financial Institutions

Following is our email conversation with a young consultant, who had questions on the specializations in McKinsey, namely McKinsey Resources or McKinsey Financial Institutions.

“Dear Michael,

We have been in contact a few times in the past and you have always provided useful advice. I used the mining version of SAAMC and it helped me on my first few business development roles in a small mining company in Australia. I have an interest in mining and resources and want to consider joining McKinsey resources specialization.

I have both a masters’ degree in business administration and undergraduate degree in finance from highly regarded Australian schools – I have attached my résumé. Could you please offer some guidance for me on this?

I want to know if this is a sector in which I should specialize, in which country I should focus, and what would be my exit options in about 5 to 10 years. I want to know if this is a sector I could do impactful work. The other option is to follow the advice of all my friends who insist I should make the jump now and move to banking where I have some experience interning at a bulge-bracket bank.



Dear JK,

Thank you for your email. I thought your email was unusual due to the last few questions you asked. To me, it seems you are not sure if the resources sector will offer the momentum your career needs, and if not, you then want to consider the financial services sector as a potential focus area.

I am also not sure if you are picking McKinsey resources because you genuinely like the sector or feel it will guide you to a better career in the long-term. I will address that here as well.

You have not defined banking which is a behemoth of a sector so I will have to make some assumptions here. As well, you listed mining and resources separately. I will assume you just mean mining companies and will leave out energy companies. I will also ignore metals companies like Arcelor-Mittal which have backward integrated to buy mines in Liberia, and energy companies which may own mines.

I notice you ask about McKinsey, but will comment on BCG and Bain as well.

As always, I will offer very detailed responses. I do not believe generalist responses are of any use, and you probably have had access to those anyway.

In answering your question I will focus on 4 areas.

First, in general, is McKinsey (or BCG or Bain) resources a better sector than financial services for you – given that I have seen your résumé.

Second, the type of work you are likely to do.

Third, which regions should you target?

Finally, fourth, your explicit exit options.

If you have followed our website, you would know we have spent the last 6 months or so travelling through Eastern Europe, the Middle East, Central Asia and South-East Asia, en-route to Australia, South Africa and then Latin America – all meeting case interview and executive clients. These are not all trips related to resources and energy clients. We are meeting a lot of banking clients. For my first few years at BBM, 4 to be exact, I spent all my time working on corporate strategy banking engagements. Not marketing strategy, not operational improvement but board level corporate strategy.

So, I can make a very good comparison between this work and the resources sector. It is only later that I ended up moving to utilities and resources.

First question

To answer the first question, there is no way to know if the resources sector is one you would like more than banking. Having expertise in a field does not mean you will like it, nor does having a strong track record show interest. You have spent limited time in both fields, but have been rather successful.

Interest is completely driven by personal choices. I can tell you this though; you want to join a sector that is fast growing. Growing companies need people, have many opportunities, and usually afford more opportunities for employees to find interesting careers. In static or declining industries, that is less likely to happen.

That said, as a management consultant, you are not an employee. When resources companies grow they need consulting help on acquisitions, integration, portfolio strategies etc. When markets bottom-out, as they invariably do in every cycle, consultants are also needed to cut costs, improve efficiencies and, again, rebalance the cycle.

There has been a lot of ridiculous talk about a commodities super-cycle. In English that means a bubble without an end and that is plain impossible. Demand ebbs and flows and we are now in a decline. That still means plenty of consulting work.

My point is that both resources and financial services are massive sectors which always need consulting help. Just because a sector is shrinking, does not mean it does not need management consulting expertise. So be wary of drawing that conclusion and using it to influence your choice.

The same applies to banking work. Financial services may be a huge sector in a relative slow-down, but that does not mean consulting work has slowed. Our travels have involved about 70% of banking discussions with executives. In any market, and for the same reasons as in resources, management consultants are needed irrespective of the state of the sector.

My point is that both resources and financial services are massive sectors which always need consulting help. Just because a sector is shrinking, does not mean it does not need management consulting expertise. So be wary of drawing that conclusion and using it to influence your choice.

Let me give you a typical example. I was in Vietnam about 2 weeks ago and met the chairman of a substantial commercial bank. They had grown dramatically as the Vietnamese economy boomed but also incurred huge costs to upgrade their branch networks. Unfortunately, growth brings inflation and currency swings. The first was bad for the client since higher inflation drove up interest rates and borrowing costs for consumers, while also encouraged carry-forward trades, in other words speculative capital. Currency swings also hurt the banks investments.

For the bank, they assumed a projected increase in transaction revenues to pay off the upgrade costs. That is unlikely to happen as planned and now they need to consider what set of steps are needed to prevent a drop in earnings, which will invariably happen due to the higher upgrade costs. The last time I looked both McKinsey and BCG were vying for the work. Clearly lots of fees for a crown-jewel client and in a, relatively, declining banking sector. Though, Vietnam has plenty of room to grow and will easily shake of this economic speed-bump. This is an example of significant impact and work in a, for now, declining sector.

Second question

The type of work you are likely to do for BBM in resources is more uniform than in most sectors. That is a vital difference between the resources sector and say banking or retail.

There is a simple reason for this. BBM will, most of the time; do work for the larger companies. These companies tend to have operations around the world and surprisingly similar issues, except at the corporate strategy level.

The point is that many of their facilities overlap, and issues tend to be site specific versus company specific.

There are many ways to break down resources companies: ferrous, non-ferrous etc. I will use ownership and structure since that has a larger impact on consulting work done than the ore dug out of the ground.

The diversified multi-nationals like Xstrata, Anglo American PLC, Rio Tinto, and BHP Billiton etc have operations in over 30 countries each and largely in the same resources groups. So, if you are helping Xstrata with their coal-fields in their Cerrejon, Colombia coal fields you will likely do similar work for a rival as well. The point is that many of their facilities overlap, and issues tend to be site specific versus company specific.

There are of course outliers here, and that brings us to the other group of resources companies like Vale, Codelco, Debswana and a list as long as my arm for state-owned resources companies around the world, but heavily represented in Central Asia. They tend to be very inefficient. Readers may disagree with this comment but all you have to do is look at the Escondida copper fields in Chile, run by companies like BHP, and compare this operation’s efficiency to a neighboring field run by Codelco. The results, and shareholder returns, are stark.

Then we have, generally speaking, single-ore companies like Barrick, Gold Fields, De Beers etc. There issues are heavily regionally focused. Gold is found in just a few major deposits worldwide and the economic and regulatory issues will drive consulting issues. The same with platinum, diamonds etc.

I always like to point out that my colleagues in the transportation and bulk logistics sectors in Australia did more work in mining than outside mining.

The next, granted not a perfect, mix of resources companies would be those who are not a major diversified multi-national, not a state-owned company or not a largely single-ore miner. This is a huge group and maybe not the best way to group them all.

It is important to remember that mines are not just large holes in the ground. They are usually built in regions with distressing systemic failure, and mining companies typically build entire towns, power stations, living facilities, and transportation lines like rail and finally harbors to ship material. There is plenty to keep people busy for a long time. I always like to point out that my colleagues in the transportation and bulk logistics sectors in Australia did more work in mining than outside mining.

The work done at these groups, and companies, does vary substantially.

Xstrata’s head of strategy is Thras Moraitis. He is an ex-Monitor man but Monitor has not done a single piece of corporate or business unit strategy work at Xstrata. Although to be fair, neither has BCG nor McKinsey, and neither Ivan Glasenberg nor Mick Davis are the types to bring in outside help. That said, just about every consulting firm, including those listed above, have done lower level operational improvement projects for the various Xstrata divisions, which are organized by ore groups.

BHP Billiton is a traditional McKinsey client even before a McKinsey alum took the reins. Both McKinsey and BCG have done numerous studies on corporate strategy, organizational alignment, funding models, significant operational studies at all level and in all regions, marketing strategies, pricing studies etc. In other words, BHP is a sophisticated consulting client.

Bain, however, is not outdone in this space. They have a long-standing relationship with De Beers whereby they advised the company to end its cartel system. Alan Bird out of London leads that effort. The interesting thing about Bain is that they have not used that relationship to broker a substantial presence into Anglo American. Cynthia Carol has clipped the wings of most consulting engagements, for now anyway, and mostly hired in ex-consultants to do the work. That said, Bain London does do a lot of work in resources.

Codelco was advised by BCG on revamping their operating model to improve efficiencies. A significant study, it seems to have yielded little results as Codelco’s efficiency continues to drop as demonstrated by the soft-landing of its all-important ROIC measure. Codelco tends to have a lukewarm view towards the quality of the study. BCG still continues to do work at Codelco, but nothing yet in corporate strategy, and the poor results of the engagement have more to do with Codelco’s paternal culture than BCG’s capabilities. There will be much more about Codelco in a future posts.

JK, I could go through all the mining, energy companies etc and give you a run-down of the work done by consulting firms. I will not though, since I think you get the picture that the work is very diverse. It could be about mining, marketing, finance, organizational structures, transportation, regulatory economics etc. So do not only think about a hard-hat and shovel when you think about resources.

Banking is equally diverse in what you can do, and I am going to draw heavily on my own experiences here so I will not name clients. I can also provide a run-down of major consulting engagements actively being done at some key banks, but I think the examples below more than suffice.

I vividly recall when a major British bank decided that its subsidiaries where too loose with their procurement budgets. That particular engagement was a lengthy exercise to count the number of coffee cups in offices, printer cartridges, flower deliveries etc. It was not the most glamorous project but we could clearly see how the project was impacting earnings. I could not say that is an engagement I would want to manage again.

In another engagement we helped a Central Asian bank find a way to invest burgeoning profits from a booming economy. That was a very interesting project since we had to create an investment arm, develop a portfolio strategy, work with the 3 executives appointed to set up the fund and help vet the initial investments: an unusual project but also very exciting. Very few engagements in my 11 year career as a management consultant had that level of pace, impact and access to purely the most senior management. Cultural issues aside, when you need to pull the trigger on an investment, it is quite different from merely advising on it, and in this case, the executives made some of the decisions and negotiated the deals while the engagement was ongoing. So we could see the impact of our advice in real time.

Unfortunately fraud and risk control is a major problem at banks and in one project we reviewed the risk assessment approach a major Latin American bank used to manage portfolio volatility. The project was technically complex given the type of calculations we were doing, but also because we needed to understand everything the risk department had already done. A strong math or finance background would have been useful to everyone in the team, but we did have analysts without this background. The skills picked up on this engagement have stayed with me forever. Most people think about risk in very vague terms. In this project we were pricing risk and understanding the impact on the balance sheet and the hit the balance sheet could take if interest rates rose, inflation changed etc. When you decide that the bank must sell $20B of loans to SMME companies to reduce the exposure, it helps to sift through the loan documents and see some of the things people write in their applications. Many have mortgaged their lives, and irrespective of what happens, someone is going to get hurt. Our calculations had better be correct to ensure the shareholder pain must minimized without creating pain for the customers.

Clearly, both resources and banking can provide equally exciting or boring engagements, depending on what you find exciting.

Question three

This is an easy one. I really do not think you pick the region. I think it picks you. Banking can be found in every country so you can build this career anywhere. Though, I am guessing you are English speaking which immediately reduces your list to about 12 countries.

Banking can be found in every country so you can build this career anywhere.

Resources is also spread across a broad mix of countries but some countries have more significant mining sectors than others: Chile, Peru, Brazil, Canada, Russia, most of Central Asia, South Africa, Ukraine, India, China, Indonesia, Australia. There are obviously more, but these are where the majors operate, and that is where the major consulting firms operate.

Given language issues, you could reasonably target Canada, UK, South Africa, some areas in the Middle East and Australia. My advice is to stick to Canada and Australia.

The reason is simple. South Africa has a declining mining industry which is deep-level and very different from the rest of the world; moreover, while it has a sophisticated banking sector, not more so than Canada, the UK or Australia. As an associate you cannot pick your sectors when you start working and I think you will want exposure to resources and banking before you make a decision. Exposure to South Africa’s banking sector will not give you a proper experience.

London is fine as well, though all the work in mining will be outside London and, while it happens, the firm is not going to make you fly back all the time thereby affording you a chance to work on a UK engagement in financial services. The firm will likely keep you in the region for several projects. Now if London is doing international work, they are doing it mostly in Africa and Eastern Europe. Not places you will get the best banking exposure, though you could get that in London.

Though, being the leader of the internal strategy teams is a euphemism for being the baby-sitter to external consultants who will always be called in for the vital strategy work. At best, you will lead internal efficiency projects.

Mining is not big in the Middle East region. Oil and gas are but these are completely different sectors. The skills, knowledge, issues and economics will not be useful to most mining companies.

Question four

This is easy to answer. If you do well, you will join senior management in a resources firm or even go into banking management. That assumes you leave at the manager or associate principal level. Leaving at a lower level you will likely join the internal strategy teams, and higher you will likely lead the internal strategy teams.

Though, being the leader of the internal strategy teams is a euphemism for being the baby-sitter to external consultants who will always be called in for the vital strategy work. At best, you will lead internal efficiency projects.

The one thing you have not been clear about is what you mean when you say banking. It is a huge sector. Australian banking is dominated by integrated banks with a cross-section of asset management, investment banking, corporate banking, commercial banking trading, insurance, wealth management etc. I assume you mean one of these integrated banks as opposed to a specialist asset management or investment banking firm.

Where you end up is completely dependent on your specialization and/or ability to prove your skills are transferable. Consultants do move all the time from banking to consulting, but in generalist roles. You are not, ever, going to switch from management consulting to running a derivatives trading desk unless you have that skill and some experience, or willing to start at the bottom.

However, if you expect to take a senior banking role in a generalist or strategy position, it is completely possibly you could do that from a consulting firm.

My advice would be to target London, Toronto or Sydney. As an associate/consultant/senior consultant etc. you will not be able to specialize, and given the structure of economies around these offices, you will end up doing mining, banking and other work as well. That is needed exposure. You can then pick for yourself where you want to go. In this way, you have complete upside in choices and no downside.

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